Tuesday, May 29, 2012

Milan - Warning Signs

By most people’s standards Milan have just enjoyed a pretty good
season. They were runners-up in the league, only behind an undefeated Juventus;
they reached the quarter-finals of the Champions League before being eliminated
by the mighty Barcelona; and lost in the semi-finals of the Coppa Italia.
However, it was still a disappointment, as they had established a healthy lead
in the race to the scudetto,
and it was a backward step compared to the previous season, when they had won Serie A for the 18th
time.

Last year’s triumph was particularly noteworthy, as it was
under the guidance of the previously unheralded Max Allegri, who won the title
in his first season – just like his more famous predecessors Arrigo Sacchi and
Fabio Capello. However, this year Milan have been plagued by injuries, losing
the likes of Mathieu Flamini, Antonio Cassano, Alexandre Pato, Thiago Silva and
Kevin-Prince Boateng for lengthy periods. As their talisman Zlatan Ibrahimovic
lamented, “Injuries have followed us for the whole season.”

Ibra himself had done his utmost to secure another title for
the rossoneri,
as his 28 league goals earned him the capocannoniere
(top scorer) award for Serie
A, though this was not enough to continue his remarkable record of
gaining a league winners’ medal every season since 2003 (with Ajax, Juventus,
Inter, Barcelona and Milan).

"Partial to your Ibracadabra"

However, whether it was down to injuries, second season
syndrome for Allegri or the simple fact that the team was not quite good
enough, the fact remains that Milan did not win any silverware – unless you
count the 2011 Supercoppa,
the curtain raiser to the new season. “Close, but no cigar” is not good enough
for a side that has a fantastic record in winning trophies, including the
Champions League on an incredible seven occasions (only bettered by Real
Madrid) and the European Cup Winners’ Cup twice.

No matter how impressive Milan have been in the past – and
they can lay claim to having the best side of all time under Sacchi – they are
now facing daunting challenges, both on and off the pitch.

Many of the old guard have left the club this summer,
including the elegant defender Alessandro Nesta, the prolific Pippo Inzaghi,
the tigerish Rino Gattuso, Mark Van Bommel and Gianluca Zambrotta. In addition,
there are question marks over the veteran Clarence Seedorf, who is mulling over
a one-year extension, and the club has not exercised loan options for Maxi
Lopez and Alberto Aquilani (though the latter may yet sign on a reduced
package). That’s a lot of experience to try to replace in one fell swoop.

"Allegri - Mad Max"

This mission is made more difficult by Milan’s financial
situation, which is by no means disastrous, but is bad enough to give the club
pause for thought. Their traditional modus
operandi has been to operate with substantial losses, which are then
covered by the owners, but this will not be possible in the new world of UEFA’s
Financial Fair Play (FFP) rules where clubs will have to live within their
means without the assistance of a wealthy benefactor.

This will test to the limit the negotiating skills of
Milan’s vice-president Adriano Galliani, who has proved himself to be a wily
old fox in the past, especially when he snapped up Ibrahimovic from Barcelona
for around a third of the price that the Catalans paid a year before. The need
for Milan to find bargains was further emphasised this summer when they signed
two international midfielders on Bosman free transfers: Riccardo Montolivo from
Fiorentina and Bakaye Traoré from Nancy.

Ibrahimovic of all people highlighted the club’s financial
woes, “Milan’s problem is economic. There is no money to buy five players, or
even the ones we need. We made a couple of signings, maybe there will be a
third.”

When you look at the club’s most recent accounts (for the
year up to 31 December 2011), you begin to understand what the big Swede is
talking about, as these reported a thumping great loss of €67.3 million.
Amazingly this actually represented a slight (€2.4 million) improvement on the
previous year’s loss of €69.8 million, an indication of Milan’s structural
weaknesses. The losses in both years would have surpassed €80 million without
the benefit of substantial tax credits, €15.7 million in 2010 and €13.3 million
in 2011.

Revenue grew by 7% to €234.8 million, but this was matched
by a €13.7 million increase in the wage bill to €206.5 million, a record high
for Milan. Note that this definition of revenue excludes €23.6 million profit
on player sales and €8.4 million increase in the value of fixed assets (shown
elsewhere). If these are added back, we get the €266.8 million of revenue
mentioned in the club’s press release.

This produced operating an operating loss of around €100
million level for the second consecutive year, which is distinctly
uncomfortable for a club aiming to be self-sufficient in the near future.

I should clarify that this analysis is based on the accounts
for the consolidated Milan Group, as opposed to just the football club AC Milan
SpA, as these are the accounts that will be used for UEFA’s FFP review. The
group accounts include Milan Entertainment SpA and Milan Real Estate SpA, but
there is not a significant difference. In fact, the loss of €67.3 million for
Milan Group is €8.2 million better than the €75.5 million registered by AC
Milan SpA.

Milan’s poor financial performance is nothing new. The last
time that the club made money was 2006 and even then the €11.9 million profit
was heavily influenced by once-off factors, namely the €40 million profit from
selling Andriy Shevchenko to Chelsea and a €27 million once-off payment for an
option on future TV rights. Since then, there have been five consecutive years
of losses, adding up to a combined deficit of around a quarter of a billion
Euros.

The only recent year that looks good on paper is 2009, when
the loss was “only” €9.8 million, but this was almost entirely due to the hefty
€74 million profit on player sales, arising from the transfers of Kaká to Real
Madrid and Yoann Gourcuff to Bordeaux. As we have seen, it is difficult, if not
impossible, to raise similar sums form player sales every year, not to mention
the detrimental effect it would have on the team.

In each of the last two years Milan have generated €23-24
million from this activity, much of which has been derived from the special
relationship that they appear to have with Genoa, who have contributed over €30
million in this period, including €17 million in 2011: Alexander Merkel €9.9
million, Nicola Pasini €3.3 million, Mario Sampirisi €2.0 million and Sokratis
Papastathopoulos €1.8 million.

One more technical point: for profits on player sales I take
the plusvalenze
less the minusvalenze
to give a net figure, e.g. in 2011 €23.6 million minus €0.3 million (to release
Onyewu Oguchi) gives the €23.3 million in my schedule.

If we exclude tax movements and profit from player sales,
then the adjusted loss for Milan over the last four years would add up to a
colossal €386 million with three of those four years coming in over the €100
million mark. In other words, with the sale of a world class player Milan make
losses; without such a sale they make large losses.

Of course, Milan are not the only leading Italian club to
find themselves in this situation. Indeed, in 2010/11 the losses were even
higher at Juventus (€95.4 million) and Inter (€86.8 million). The big three
contributed 89% (€252 million) of the total Serie
A losses of €285 million. Note that I have used Milan’s 2010 loss in
this schedule to be consistent with a survey prepared by La Gazzetta dello Sport,
but the loss is around the same level in any case.

More encouragingly for Italy’s top flight is that the number
of clubs making a profit in 2010/11 doubled from the four in the previous
season to eight (Bari, Lazio, Palermo, Catania, Napoli, Udinese, Parma and
Brescia). This list includes two clubs that qualified for the Champions League
(Napoli and Udinese), so sound husbandry of a club’s finances need not
necessarily mean lack of success, though it should be acknowledged that some
did benefit from substantial player sales.

Over the last three seasons it has been more or less the
same story of colossal losses at both Milan clubs, who are by some distance bottom
of Italy’s profit league. Juve’s losses over the period are virtually all
because of 2010/11, mainly due to not qualifying for the Champions League and
investing in their new stadium, while Milan and Inter’s figures have been
consistently poor. At least Milan win the financial Derby della Madonnina with Inter’s
astonishing losses of €310 million in this period being more than twice Milan’s
€146 million. In truth, neither club has much to write home about on this
topic.

But surely all the top football clubs lose money, right?
Actually, that’s not really the case, as a few did report profits in 2010/11:
Real Madrid made a sizeable €47 million, thanks largely to their enormous
revenue; Arsenal €14 million, boosted by property sales; and Manchester United
€11 million, as their awesome cash generating capacity was enough to cover
interest charges on their massive debt. Bayern Munich only recorded a small
profit of €1 million, but this represented their 19th consecutive year of
profits. Even big spending Barcelona’s loss was relatively small at €9 million.

Of course, some leading clubs abroad also employ the sugar
daddy model, such as Champions League winners Chelsea, who made a loss of €75
million, while Manchester City’s attempt to gatecrash the party cost them €219
million. Even so, it is clear that Juventus, Inter and Milan all face more
serious issues compared to the others, as their ability to generate additional
revenue in the short-term is more constrained.

That said, Milan’s revenue is not too shabby by Italian
standards. In fact, for 2010/11 (the last season when all clubs have published
accounts), their revenue of €220 million was the highest with only Inter
anywhere near them (€211 million). The other clubs were miles behind with only
three others earning above €100 million: Juventus €154 million, Roma €144
million and Napoli €115 million. This is despite the leading lights effectively
transferring some of their revenue to the others after the collective TV deal
was implemented.

However, as John Donne said, “No man is an island” and Milan
also have to look beyond their borders at other European clubs. At first
glance, Milan appear to be sitting pretty at seventh place in Deloitte’s Money
League, but problems begin to emerge on a closer inspection, as they are a long
way short of their peers abroad. In particular, the Spanish giants generate
significantly more revenue with Real Madrid (€479 million) and Barcelona (€451
million) earning around twice as much as Milan, benefiting from huge individual
TV deals.

Both Manchester United (€367 million) and Bayer Munich (€321
million) earn around €100 million more than the rossoneri,
the English taking advantage of significantly higher match day revenue, while
the Germans’ commercial expertise puts everyone else to shame. In fact, at the
latest exchange rates United would also break the €400 million barrier. This
vast revenue discrepancy makes it difficult to compete, especially when that
shortfall in turnover occurs every year.

Eagle-eyed observers will have noticed that Milan’s revenue
figure of €235 million is different to the €253.2 million included in the
club’s accounts for 2010. There are two reasons for this. First, in order to be
consistent with other countries, Deloitte excludes: (a) player loans €0.5
million; (b) profit from player sales €25.5 million; (c) change in asset values
€7.6 million. Adding those to the €220 million shown in my analysis gives the
€253.2 million reported in Italy.

Second, Milan’s accounts cover a calendar year (up to 31
December), while the majority of clubs’ figures coincide with the football
season, so the accounting close is in June. Because of this anomaly, Deloitte
adjust Milan’s figures based on information provided by the club, leading to
the €235 million in their league table.

Regardless of all these technical adjustments, the
underlying themes for Milan (and Italian football) are very much the same. A
recent report from the Italian Football Federation (FIGC) concluded, “The
current business model is difficult to sustain and not very competitive.” Its
president, Giancarlo Abate, noted that in particular match day income,
sponsorships and merchandising were in need of urgent attention to reduce the
reliance on TV money.

These problems have been reflected in the lack of revenue
growth of Italian clubs. Since 2005 Milan have managed to grow their revenue by
just €20 million (9%), which is only ahead of Juventus among leading European
clubs. In that period they have been overtaken by Barcelona, Bayern Munich and
Arsenal. Most strikingly, Barcelona’s revenue was €7 million lower than Milan
in 2005, but is now far over the horizon at €216 million higher, while the
investment in new stadiums at Bayern and Arsenal has really paid dividends. As
Galliani put it, “Twenty years ago Milan invoiced more than Real Madrid, today
only half. That’s the real problem.”

Essentially, Milan’s revenue has been flat for the last few
years, though this disguises two opposing factors: TV revenue has fallen by €29
million since 2006 to €114 million, largely due to the move to a collective
deal, while commercial income has increased by €23 million to an impressive €91
million.

Match day revenue has also risen by €3 million, though it
remains a feeble €29 million, just 13% of total revenue, which, in fairness, is
typical of all Italian clubs and helps explain their relative revenue weakness.
Despite the decline in TV revenue, it is still the most important revenue
stream, accounting for just under half of Milan’s revenue. This is partly due
to the higher payout from the Champions League, which rose €16 million in 2011,
more than offsetting the €7 million fall in domestic TV money.

The €114 million earned from television in 2011 comprised
€78 million from the domestic deal and €36 million from the Champions League (a
combination of the last 16 in 2010/11 and the group stage in 2011/12). They
received the third highest domestic money, just behind Juventus and Inter, but
a fair bit more than other Italian clubs, e.g. Napoli and Roma got around €60
million; Lazio about €50 million; and Fiorentina, Palermo and Udinese around
€40 million.

This represents an improvement for mid-tier clubs following
the implementation of the new collective agreement in 2010/11. Under the new
allocation, 40% is divided equally among the Serie
A clubs; 30% is based on past results (5% last season, 15% last 5
years, 10% from 1946 to the sixth season before last); and 30% is based on the
population of the club’s city (5%) and the number of fans (25%).

The result is a reduction at the top end, so Galliani is not
a happy customer, “In football big teams have to share income with other sides
and this is an anomaly.” This may be a bitter pill to swallow, but it has been
sweetened by the distribution formula, which still favours the top clubs to an
extent with the allocations based on historical success and number of fans.
Even now, Milan’s TV income is the sixth highest in Europe.

Furthermore, the decrease would have been even higher if the
total money negotiated in the new deal had not been 20% higher than before at
around €1 billion a year. This cemented Italy’s position as the second highest
TV rights deal in Europe, only behind the Premier League, but significantly
ahead of the other major leagues, despite the Bundesliga
increasing its rights by over 50% for the next four-year deal. The new French
contract has actually fallen from €668 million to €612 million, considered a
good result in this harsh economic climate.

As you might expect for a club with media magnate Silvio
Berlusconi at the helm, television income has always been important to Milan,
climbing as high as €140 million in 2007, the highest in Europe, partly due to
a sensational domestic deal, but also thanks to the payment received for
winning the Champions League.

Qualification for the Champions League is imperative for
Milan with the accounts identifying this as a key risk for the club’s economic
prospects. This can be seen in 2008/09, when Milan earned just €0.4 million
from the UEFA Cup, compared to €25.8 million from the Champions League in
2010/11. This was made up of €7.2 million participation fees, €2.4 million for
performances in the group (2 wins at €800k plus 2 draws at €400k), €3 million
for reaching the last 16 and €13.2 million from the TV (“market”) pool.

The money received for 2011/12 should be much higher: (a)
Milan progressed further (to the quarter-finals); (b) they will receive more
from the TV pool, as they won Serie
A in 2010/11 (half is allocated based on finishing positions in the
previous season’s domestic league).

The size of the prize is now enormous, as we can see from
the finalists in 2010/11 (Barcelona and Manchester United) each receiving over
€50 million, not including additional gate receipts or increases in sponsorship
payments. Financially, the Europa League provides little compensations, with
the four Italian clubs only receiving around €2 million each.

Furthermore, there has been talk in the English media of
Champions League revenue significantly increasing in the next three-year agreement, citing
David Taylor, UEFA Events’ chief executive, “We have at least achieved
triple-digit growth.” Unfortunately the Italian league has lost a place to the Bundesliga, due to
lower coefficients, so now only the top two teams in Serie A are assured of direct entry,
while the third-placed team goes into the preliminary qualifying round.

The most glaring revenue weakness for Milan is match day
revenue. Even though this is the highest in Italy at €36 million (ahead of
Inter €33 million, Napoli €22 million and Roma €18 million), it is dwarfed by
major clubs in other countries, especially England. Chelsea earn more than
twice as much €81 million, while Manchester United €130 million and Arsenal
€112 million generate around three times Milan’s figure. Granted, they have
staged more home games, but United earn €4.5 million a match compared to
Milan’s €1.4 million.

Although Milan have the highest average attendance in Italy
of 51,400, this was a 4% reduction from the previous season and means that only
64% of the stadium’s capacity was filled. In fact, Milan’s crowds have dropped
significantly from the 64,500 average achieved in 2002/03. In fairness, this is
a generic problem in Italy, where total attendances in Serie A have slumped from 9.4 million
in 2008/09 to 8.9 million in 2010/11 (per the FIGC), despite low ticket prices, due to a combination of
obsolete stadiums, poor views and, let’s be frank, the suspicion of match fixing.

This is why Milan have been exploring opportunities for
moving to a new stadium that could maximise their revenue earning potential.
It’s not just that the club currently pay the council over €4 million rental a
year under a 30-year lease ending in 2030, but the lack of ownership means that
they miss out on profitable opportunities like premium seating, corporate
boxes, restaurants, retail outlets, naming rights and non-sporting events. As
Galliani explained, “A new stadium is essential for a club that wants to
compete in the future. Look at Bayern Munich: since they built a new stadium,
their revenue has increased by €60 million.”

Closer to home, Juventus have just moved into a fabulous new
arena, but are the only leading Italian club to own their stadium. Although it
cost them around €150 million to build, much of the funding was sourced from
innovative deals, e.g. 60% of the money was derived from a naming rights deal.
Milan would undoubtedly require substantial funds to do the same, but the
benefits would be substantial, e.g. Juventus believe that their match day
revenue will at least double,

Galliani recently revealed that the club had tried to buy
San Siro, but the price quoted by the council was too high, so they have
instead turned their attention to modernising the ground in order to develop an
“elite stadium”, ready for the 2015 Champions League final. However, he
admitted that this was not ideal, due to “the problems that follow when you
share it with another club.” Any new development will be a long-term project,
e.g. even Juve’s new stadium took more than 10 years to complete after the
first discussions with their local council.

"Silva and Gold"

It had been hoped that new stadiums would be developed as
part of Italy’s bid for Euro 2016, but unfortunately this was lost to France,
as was the catalyst for government intervention. Galliani warned, “Germany have
overtaken us thanks to the wonderful new stadiums they built for the World Cup
in 2006. Thanks to the new stadiums being built for Euro 2016, I predict that the
French will also overtake us.” This is why Italian owners hope that new laws
will be introduced to facilitate new stadium construction.

Whatever the solution, something must surely be done, as
this massive revenue shortfall means that Milan are not competing on a level
playing field, especially with the advent of FFP. As Galliani lamented, “The
rankings for revenue and sporting success tend to coincide. The gap comes from
different points of departure: in the case of Milan the gate receipts do not
reach €30 million a year.”

Where Milan have really begun to motor is in their
commercial operations, as revenue here has really taken off in the last two
years, rising by €10 million (13%) in 2011 alone to €91 million. This is not
only the highest in Italy by some distance (Inter and Juventus are the closest
challengers at €54 million apiece), but is also the fifth highest in Europe.
That said, Milan still only earn half as much as Bayern Munich’s astonishing
€178 million and are a long way behind Real Madrid’s €172 million and
Barcelona’s €156 million.

Commercial revenue was inflated by once-off payments in 2009
and 2010: the former contained €20 million for the sale of Milan’s image
archive, while the latter included €5 million for the sale of some apartments. Excluding
these once-off items, the underlying growth since 2009 has been a very
impressive 50%, partly due to the partnership with Infront, who handle all
sponsorships except kit deals. Progress can be measured by the raft of new
sponsors signed up in the last 12 months, including Taci Oil, Indesit, United
Biscuits and Nivea for Men.

Milan have long-term deals with their shirt sponsor and kit
supplier. The Emirates contract runs until 2015 and is worth a guaranteed €12
million a season plus performance related bonuses (€2.7 million in 2011), while
the Adidas kit deal has been extended to 2017, generating €17.5 million last
year, including a €1 million performance bonus.

However, these agreements are still worth much less than
those at foreign clubs, e.g. Manchester United, Barcelona, Real Madrid,
Liverpool, Bayern Munich and Manchester City all have shirt sponsorships worth
more than €20 million a season. Similarly, the first four of those clubs have
penned kit supplier deals for over €30 million a year,

Milan reportedly sell between 400,000 and 600,000 shirts a
season, which would put them in the top ten clubs worldwide and around the same
level as Inter and Juventus, though the likes of Real Madrid and Manchester
United sell nearly three times as many. The rossoneri
are now looking to make more from global opportunities, e.g. this summer they
will play prestigious friendlies against Real Madrid and Chelsea in the United
States.

Fundamentally, the most important challenge for Milan is the
wage bill, which rose €14 million in 2011 to a totally unsustainable €206
million. Even though most of this increase was due to higher bonuses for
winning the scudetto
in 2011, the fact remains that this is the highest wage bill in Milan’s history
and the second highest ever for Serie
A, only surpassed by the €234 million paid out by Inter in their
2009/10 treble winning season.

Since 2006 wages have grown by 50% from €138 million to €206
million, while revenue has actually decreased by €3 million in the same period,
leading to a rise in the important wages to turnover ratio from 58% to 88%.
This is much worse than UEFA’s recommended maximum limit of 70%, though Milan
are far from alone in struggling to confront this issue in Italy, as seen by
Juventus (91%) and Inter (90%).

In Italy only Inter come anywhere near Milan’s wage bill. In
2010/11 they were just behind Milan’s €193 million with €190 million, while the
next highest were Juventus €140 million and Roma €107 million. To place Milan’s
wage bill into context, it is around the same as Fiorentina €55 million, Genoa
€52 million, Napoli €52 million and Lazio €39 million combined. An analysis by La Gazzetta last
summer suggested that the cost of Milan’s first team squad of €160 million was
far above Inter’s €145 million, but it’s far from certain that their figures
are accurate.

Milan’s wage bill also looks excessive in comparison with
foreign clubs, only surpassed by Barcelona €241 million (including other
sports), Real Madrid €216 million, Manchester City €209 million and Chelsea
€202 million. Strikingly, it is higher than Manchester United and Bayern
Munich, who have been more successful recently. It is also apparent that most
of these clubs have a much better wages to turnover ratio than Milan, because
of their higher revenue, e.g. Real Madrid 45%, Manchester United 46%, Bayern
49% and Barcelona 53%.

Galliani has recognised the problem, “Both Fininvest and I
are trying to reduce the amount of money spent on wages.” However, we have
heard this before. Last year, he said, “Milan absolutely have to reduce the
wage bill. It is difficult to increase revenue, so we have to act on the
salaries and hope that the players understand, especially with financial fair
play.” The problem is that it is difficult to cut the wage bill without
reducing the competitiveness of the squad.

That said, Allegri appears to be on message, “We had 33
players in the squad this season, but that was because we had to make some
adjustments in January because of injuries. We’ll have a 25-26 man squad,
including three goalkeepers, for the new season.” Many senior players have left
this summer, while others will be only be given contract extensions on reduced
terms, e.g. Flamini has reportedly been offered €1.75 million instead of his
current €4 million, while any offer to Aquilani will also be much lower. Using
salary figures from La
Gazzetta, the gross saving would be at least €30 million. Clearly
some players will need to be replaced, but the cost should be much less, e.g.
Van Bommel and Gattuso were both costing €7 million.

The other element of player costs, namely amortisation, has
also been rising, having doubled from €22 million in 2006 to €45 million in
2011, though it is still lower than Inter €52 million and Juventus €47 million
– and miles behind a big spender like Manchester City €101 million. In
addition, the club has written-down €9 million in player values in the last two
years for the sales of Ronaldinho and Ricardo Oliveira.

As a reminder, amortisation is the annual cost of
writing-down a player’s purchase price, e.g. Ibrahimovic was signed for €24
million on a 4-year contract, but his transfer is only reflected in the profit
and loss account via amortisation, which is booked evenly over the life of his
contract, i.e. €6 million a year.

This growth is a reflection of Milan’s activity in the
transfer market, which can be divided into three periods in recent times.
First, the boom time with €237 million net spend in the four years up to 2003;
then the age of austerity with net sales proceeds of €18 million in the seven
years up to 2010, when Milan had to “sell before we can buy” per Galliani;
finally a return to investment with net spend of €51 million in the last two
years.

Milan might be shopping at the cheaper end of the market,
e.g. Stephen El Shaarawy for €10 million and Kevin-Prince Boateng for €7.5
million, but this has still been enough to make them the third highest spenders
in Serie A
during this period, only beaten by Juventus €101 million and Roma €58 million.

The annual deficits have resulted in net debt doubling in
the last five years to stand at €292 million, comprising €156 million of bank
loans plus €136 million owed to factoring companies based on future income.
Most of this is short-term debt, but is supported by a €390 million line of
credit from Fininvest. On top of that Milan owe other football clubs €30
million, mainly €16 million to Barcelona for Ibrahimovic and €10 million to
Manchester City for Robinho, though are themselves owed €16 million by other
clubs.

In fairness to Milan, this is a problem throughout Italy
with La Gazzetta
complaining that clubs were “buried under a mountain of debt”, following the
14% increase last year to €2.6 billion, but it is worth noting that Milan’s
debt breaches one of UEFA’s warning indicators, as it exceeds 100% of revenue.

In fact, Milan’s balance sheet is the weakest in Serie A with net
liabilities of €77 million, even after an improvement from €97 million the
previous year. This is a little misleading, as the value of the players in the
accounts of €136 million is smaller than their worth in the real world (€271
million according to Transfermarkt),
but it is nevertheless an indication of the club’s financial fragility.

This has necessitated the support of the owners with
Fininvest pumping in €210 million in the last five years, including €87 million
in 2011 alone (plus a further €25 million in March 2012). As Galliani put it,
“The losses have been completely covered by Fininvest. I thank the president
for his passion. Without Fininvest, we couldn’t be an example of sporting
excellence the world over.” Berlusconi wryly echoed these thoughts in a message
to new Roma owner Thomas DiBenedetto, “You spend lots of money and earn
nothing.”

Although the cash flow statement suggests that Milan are
fine at an operating level, the reality is that they cannot afford to purchase
players without increasing debt and/or additional funding from the owners.
Incidentally, player purchases are much higher in cash terms than has been
reported in the media, presumably due to the nature of some of the rights
sharing deals with Genoa.

These difficulties have raised the prospect of Berlusconi
selling Milan, especially as Fininvest is not exactly thriving in today’s tough
economy, exacerbated by the €560 million fine following a court ruling that it
bribed a judge during the Mondadori takeover battle. His daughter Barbara, who
joined the board in 2011 “to reaffirm and strengthen the tie between the team
and the family”, has said that her father has no intention of moving on, but
there has been talk of selling a 40% stake to an overseas investor, though they
might be put off by the stadium issue.

Even if Berlusconi did want to return to the good old days
with a few extravagant purchases, he needs to be mindful of UEFA’s Financial
Fair Play regulations, which will ultimately exclude from European competitions
clubs that continue to make losses.

Fortunately for Milan, all of the losses made to date are
not considered for FFP, but they have to get their act together immediately, as
the first monitoring period will taken into account losses made in 2012 and
2013. However, they don’t need to be absolutely perfect, as wealthy owners will
be allowed to absorb aggregate losses (“acceptable deviations”) of €45 million,
initially over two years and then over a three-year monitoring period, as long
as they are willing to cover the deficit by making equity contributions.

Getting to break-even will be an arduous task for Milan,
because they will need to radically overhaul their strategy, as conceded by
Galliani, “FFP hurts Italy. There will no longer be patrons that can intervene.
Until now people like Berlusconi and Moratti would be able to support us, but
with the fair play it will no longer be possible.”

"Duck Rock"

Barbara Berlusconi underlined the need for change, “Soccer
teams will have to transform into proper companies. If you can only spend what
you get, then you have to keep costs in check and increase revenue. It’s a
challenge that can become an opportunity.” That’s undoubtedly true, but, given
Milan’s limited scope to increase revenue, that effectively means cutting the
wage bill, which Galliani accepted, “No question, we’ll need to reduce our
expenses.”

Alternatively, Milan could boost profits by selling players
and both Thiago Silva and Ibrahimovic are much in demand, though the dilemma
was neatly summarised by club legend Paolo Maldini, “If you want to win
something, then you can’t do without them. If the objective is to balance the
accounts and have a decent campaign, then you can sacrifice one of the two.” On
the other hand, the club might be willing to listen to offers for Robinho or
Pato, who are not indispensable.

"KPB - a prince among men"

In a certain sense FFP might actually point the way forward
for Milan, as the break-even analysis excludes costs for stadium development
and the youth academy. The latter has proved a little disappointing in recent
years, especially when you consider that Milan’s greatest teams have always
included many in-house products like Franco Baresi, Billy Costacurta and that
man Maldini, but Galliani only last week stressed the importance of youth
players breaking into the first team.

Right now, Milan will need to show some fancy footwork to
improve their finances, while maintaining their ability to challenge at the
highest levels. Ibrahimovic has already voiced his disquiet about the change in
direction, “There used to be a great Milan project, now we’ll have to see if
they take it forward”, but the Berlusconi-Galliani axis really don’t have too
many options. If they do manage to pull this off, then we will have to accept
that the devil really does have all the best tunes.

This is a great article. I am really worried for Milan, the deal to rent the San Siro until 2030 is also worrying, I hope there can be a way to discard it and for Milan to build a new stadium, I am ready to live for 10 years in the limelight, depending on upcoming talent from the youth squad, until the stadium is ready. Rather than seeing this Collosal club sink in debts and I fear bankruptcy in the future. Forza Milan

Thanks for this article, I'm a your big reader and I was waiting for one on Milan for a long time.I just want to say that the situation is even worst than I thought, I don't believe they are planning a stadium for real, I think they just talking about it because it is the right thing to do.What about the new Roma? Is there anything about them? I think it's a fascinating project.

Another informative article here, as always. I think Milan can improve their financial situation a bit as long as they can keep doing well in Champions and Serie A and most importantly stop making those January buys. The squad should be trimmed and gamble more on the youngsters, a trim squad with standard wages, might cut the financial problem bit by bit.. Big squad with very huge wage bill is one of their main issues aside from not having their own stadium.

I warned you on twitter regarding some follow up questions about your analysis.

The first one concerns the debt:Regarding the bank loans. Does the club state any time limit or plan to when the debt must be paid? As you state, most of it is short term debt.

Regarding the “other loans” I remember that you – in your first Milan blog – said that this was the so called factoring (and in this one I see ). Are there any more details in these loans? Why have the short term gone from 145 to 101 in 1 year etc? Is it Fininvest who are owed these amounts?

Which debt level is, in your opinion, healthy for a club like Milan? Especially concerning the possibilities of raising further debt if a possible stadium is to be built in the future?

Regarding FFP

You have previously talked about some cost which could be excluded. For instance today, you said on twitter that Chelsea could exclude costs of £18 due to youth, depreciation and community.

Furthermore there is the issue of contracts signed before June 2010. Do you have an idea what amount this would add up to at Milan.

BonusesLast but not least there is a matter of bonuses which could be divieded into two aspects:

1) Players: Does the accounts state how much the club paid its players for winnings Serie A. I’ve read that Ibrahimovic receives 2M euro if he wins a Scudetto.

2) Sponsors: How much will the club miss out on in total due to the lack of a Scudetto. What was the total gain in bonuses?

2. Again, not much information provided with reduction in other loans described as being in line with contract signed by Milan Entertainment Srl.

3. That’s difficult to say, as it depends on the terms of current debt, i.e. interest charges, repayment schedule. The current debt levels are certainly an issue when it comes to funding any new stadium, though, as I said, there are innovative methods of financing that might help.

4. Youth costs not separately itemised in accounts. I would think Milan could justify maybe €15m for FFP exclusions, but that's only a guess.

I’ve not done any analysis of pre-June 2010 salaries, but please note that any contracts extended after June 2010 would have to be included for FFP. Also many of the old guard have left this summer, so impact will be smaller.

5. Not exactly, though they do state that €13.7m of the increase in the waqe bill was due to bonus payments for sporting achievements. It does not say: (a) how much was paid in total; (b) how much was for winning the scudetto.

6. Total gain in commercial income mentioned in accounts for winning Serie A was €3.8m.

Not as detailed a response as I would like, but I hope that helps a little.

Off on a bit of a tangent here regarding FFP but I am wondering if it is possible to get around it by making a donation to a mid to bottom of the table club who would then use that money to buy an out of favour squad player. A purely fictional example scenario:-if Roman Abramovich struck an agreement with say Genoa so he or his company would donate £50Million for them to use to buy an out of favour player (maybe Ferreira), would Chelsea (or any other club) then be able to use this as a way of buying around the FFP rules?

Another great article. Italian football used to be the FOOTBALL to watch in the 80s and early 90s. I think Italy has missed out after their World Cup in 1990. It was an opportunity to build and rebuild their stadia, but they only refurbished them. The result was old grounds, (fair enough, they were new inside) with running tracks which spoil the game and the atmosphere in the ground. I remember going to the old Stadio del alpi in Turin for a game v Manchester Utd, atmosphere was awful. Juventus have understood the issue and have now a new (albeit smaller than before) football ground.

Surely, they will be loopholes in the FFP rules. What will stop Belusconi (or any benefactor) from signing a 50m euro (or more) shirt sponsor deal from one of his companies?

With Genoa-Milan were pure player swap, so it did not affect the cash flow, (with Egyptian-German deal a exception, but normally transfer in Italy always in instalment as Lega Calcio had a centralized fee distribution system) However Milan do had to pay for Amelia, Boateng and Paloschi in real money.

Pure exchange deal in the past, was creative accounting. As youth product did not had asset value in accounting, which would under-estimate clubs such as Barcelona. However Italian clubs fully utilise the difference between the amortization and capital gains, to borrow money from the future. While VAT as interests. We can't judge the price tag of 30M Euro rated Coco and Seedorf was above (or below) fair , real market value (And 38M rated Crespo and 12M rated Corradi, or 28M rated Emerson and 16M rated Brighi), they did a short terms effect on balance sheet, which the Italian media they were at least immoral but may be not illegal (as the "created" value as intangible asset had to amortized at the end plus VAT cost)

But certainly a false accounting to sell a ghost players with millions price tag was somewhat "sports fraud". FIGC once fined those clubs (yes, Italian media said the false accounting made the club passed the financial test that they should failed, but such as big issue the fine was so small)

Back to year 2010. Why amortization raised to such level was basically exchange deal again.

In 2010 Milan bought 3 players from Internazionale for 7 million, however none of them with the current squad: Filkor, Daminuţă and Fossati. as they were bought in mid 2010, their amortization counted for 0.5 year only, which 2011 was the first full year the deal made effect. Assuming 4.5 year contract, they at least made Milan had to amortize 1.5 million a year. If the player do worth 7 million or more in the future, that just a risky investment, but eventually worth nothing, a suspiciously 7 million transfer to Inter.

Then back to Genoa-Milan deal. Papastathopoulos's deal was actually paid via cash plus player deal. Despite the players Zigoni, Oduamadi Strasser left the club in co-ownership deal and again returned to Milan by purchase half, their book value were again based on 2 times the bought price of the 50% registration rights. Again, Papastathopoulos's amortization cost was half in 2010 year (just 1.4 million). But in 2011 it was 1.4 million in the first half of the financial year plus the amortization of Zigoni, Oduamadi and Strasser! Which certainly more than 1.4 million.

Then the 2011 swap deal. Gain of Pasini actually came from the purchase of Chinellato and Sampirisi came from Pele, the swap deal again increase amortization. We did not know the true value of the players yet, but the gain from player swap was stacking the effect of amortization.

Lazio used another approach. Instead of labelling a value for the players they signed in cash-plus-player swap, Cana, Pandev and Garrido all "worth" a peppercorn in their accounts to avoid some future amortization or accuse of over-valuing in order to flop the selling profit.

Could Milan book El Shaarawy signed for Milan for 10 million (5 in half), 5-year contract and the sale of Merkel for peppercorn? Certainly can, then the net effect on Milan was 1 million amortization cost only in 2011 (note that co-ownership deal was treated as full card in amortization, the full amortization schedule would be 1-2-2-2-2-1) and 10 million selling profit on Genoa account (not that the profit in co-ownership, half of them would became co-ownership asset/payables/credit and the effect on future re-negotiation became financial income/cost).

However in currently schedule, it would be 10 million selling profit on Milan and 2 million amortization (2-4-4-4-4-2) and GENOA 20 million profit and 1 million amortization (1-2-2-2-2-1).

In the past Roma did not recapitalized and use player-swap to create a massive 60 million "asset", however it became toxic and the club amortizate in special 10-year amortization fund (actually the special fund labelled the toxic asset but amortize in lower rate). But the amortization fund eventually not allowed by UEFA in 2006 and the club had to write-down a massive 80 million. Lazio also write-down Corradi (12 to 5.5) to the special amortization fund. In Milan case, Paloschi 10M price tag, 7M Inter players, Strasser Oduamadi and Zigoni, Pele and Chinellato should either write-down, or immediately found a buyer if they really worth that tag, or it would bleeding again in 2012 (as again, the club had to swap in 2012 in order to cover the hole and Chinellato, Pele full year effect)

As you state there are many rumours regarding the club wanting to sell 40% of its shares. But isn't far from certain that the money from this sale would benefit the club? It could might as easily just go back to Berlusconi family in order to get som back for all the investments during the years?

If berlusconi signed milan under fininvest or another company that he owns and he struck a mamoth sponsorship deal, that would certainly be a way for him to still provide for milan whilst abiding the FFP right?

"If berlusconi signed milan under fininvest or another company that he owns and he struck a mamoth sponsorship deal, that would certainly be a way for him to still provide for milan whilst abiding the FFP right?"

See MCFC and Etihad.

I don't like FFP. It applies the same financial rules to a club like Arsenal (owns their stadium) to a club like Mlian (big rent payments).

@swissramble: what're the odds re players/agents suing on the grounds that FFP is a back door salary-cap, and an anti-trust violation?

A really excellent artice as always, the part that bothers me the most is the revenue growth in the last 7 years, that is the area where Berlusconi and Galliani don't have a leg to stand on when you look at what Barca, Bayern and Real have done. I don't even think fans like myself would worry so much if we brought through some exciting youngsters like Arsenal do but it's always the same trash like Muntari, Mesbah and Traore. We definitely need a manager who will play the youngsters

um that doesn't seem right milan were making a active effort to make cost saving policies but in 2010 in addition the club cut 50 million euros for the nezt 3 season of the wage bill with the sale of kaka something like 19 million euros after tax in addition milan wage bill seem to increased by 30 million euros in the 2010 period yet as pointed out milan had already made a saving. in addition milan cut a further 15 million euros off the wage bill from various loans and sales. the incoming cost of wages don't really account for that milan signinsg hunterlaar borriello and oneywu wages after tax added up to 18 million euros. added that the club announced post tax profits of 32 million in 2010 or that is at least what i remember.

I would love a response or another article source sent to me i will check here and leave my email which is purple-daze@hotmail.com thanks for your response

Praise for The Swiss Ramble

"Blogger of the Year 2013 - It’s testament to the effect that Kieron has had on the blogosphere that so many fans take his word as gospel. Putting to use his career in the world of finance, his insights into balance sheets and simple explanations of complex ideas appeal to the hardcore financial whizz and casual fan alike." - The Football Supporters' Federation